What is the main consequence for an employee if too little withholding tax is taken from their paycheck?

When an employee has too little withholding tax taken from their paycheck, the primary consequence is that they may owe taxes at year-end. Withholding tax is the amount of income that is deducted from an employee's paycheck and sent directly to the government as a prepayment of their estimated tax liability for the year. If the withholding amount is insufficient to cover the total tax liability for the year, the employee will be responsible for paying the balance when they file their tax return.

Under-withholding can occur for various reasons, such as incorrect completion of Form W-4 or significant changes in income throughout the year. Consequently, when the employee files their tax return, they may find that they owe money to the IRS, which can lead to financial strain or unexpected expenses.

In addition, while it is true that lower withholding may result in higher take-home pay during the year, this should be seen as only a temporary benefit, overshadowed by the potential for owing taxes later on. The focus here is that the lack of proper withholding can lead to an unsettled tax obligation that the employee needs to manage when tax season arrives.